Supermajors' resources might be drying up

Large oil and gas companies are facing challenges to production growth

Allen Good 30 November, 2009 | 2:08PM

ConocoPhillips' recent decision to reduce its asset base and capital spending in the coming years brings to the forefront the challenges facing the supermajor oil and gas companies. Despite dominating hydrocarbon development throughout the world during the last century, these six firms are now facing unprecedented difficulty in their pursuit of reserves. Jim Mulva, CEO of ConocoPhillips, cited the inability to gain access to resources as a primary reason for the company's strategic shift.

However, the other supermajors are unlikely to follow in ConocoPhillips' footsteps, in our opinion. We expect the remaining supermajors to continue investing at their historical levels. Production growth, however, will remain a challenge, given the limited opportunities for investment. Company forecasts for growth are anaemic. ExxonMobil expects production growth of 2%-3% during the next five years. BP forecasts production growth of 1%-2% until 2013. Total is targeting 2% through 2014. Royal Dutch Shell plans to increase annual production by 2%-3% through 2012. Chevron may reach 6% growth this year but is unlikely to achieve its earlier goal of a 3% compound annual growth rate from 2005 to 2010. OPEC curtailments, production-sharing arrangements, project delays, and disruptions from political upheaval can all prohibit the companies from reaching their goals. Even with these relatively low growth rates, supermajors will have to fully exploit their strengths to achieve their goals in an increasingly resource-restricted world.

Resource nationalism
Given the location of the world's remaining reserves, it is easy to see how accessibility has become an issue. Foreign governments and their national oil companies (NOC) control an estimated 95% of the world's remaining reserves of oil and gas. These countries also control the majority of reservoirs large enough to warrant investment from a supermajor. Although the large amounts of resources held by governments and NOCs limit the resources available to international oil companies (IOC), they also present an opportunity. Many oil-rich countries can be viewed as a microcosm of global oil production. After 50 years, production rates in large fields are declining because of natural depletion while newly discovered reservoirs are in difficult-to-extract locations. Some NOCs, either through mismanagement or inexperience, are struggling to keep production flowing at historical levels.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BP PLC297.55 GBX1.99

About Author

Allen Good  Allen Good is a senior stock analyst covering the oil and gas industries.

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